Looking beyond the oil royalty issue

As stated in my previous article, it is not wrong for Sabah to ask for an increase in oil royalty if it can prove that the billions of ringgit distributed by the federal government through various grants are insufficient to develop the resource-rich state. Since 2008, Sabah is one of the biggest beneficiaries of the federal financial allocation. It is also important for state leaders to convince PETRONAS and the federal government that the increase in oil royalty from 5 percent to 20 percent will not adversely affect the sustainability of oil production in Malaysia. While most leaders are harping on the issue continuously, none so far has been able to provide a viable solution to put an end to it.

But before the increase in oil royalty is to be considered, several factors must be put into consideration. It is wrong to assume that out of the 100 percent oil revenues that go to PETRONAS, only 5 percent is given to Sabah while the remaining 95 percent is “grabbed” by the national oil company. This is the popular misconception among Sabahans. PETRONAS’ revenues with its PSC (Production Sharing Contract) partners make up 45 percent of oil incomes obtained by the national oil company. Another 45 percent is for recovery cost and 5 percent more goes to the federal government. After tax deductions of 38 percent, PETRONAS gets roughly 16 percent in profit while its PSC partners 11 percent. Because managing oil business requires certain skills and knowledge about drilling and exploration, it is necessary for PETRONAS to team up with international oil companies such as Shell, Murphy and ExxonMobil through “production sharing contracts”. The decision to enter into joint-venture projects with these oil giants is also strategic from the business point of view because they can absorb the risks associated with oil drilling and exploration.

So, an increase in oil royalty will not only affect PETRONAS’ overall business operation but its ability to manage oil sustainably. An increase in oil royalty will also reduce tax contributed by PETRONAS to the federal government’s financial coffer. Tax money from PETRONAS is used to build schools, hospitals and a host of other public amenities for Malaysians not only in Peninsular Malaysia but Sabah and Sarawak.

Sabah leaders must give due consideration to the constraints faced by the federal government and PETRONAS. If they still want to pursue the oil royalty demand, a viable method of revenue-sharing must be put on the table for all of the interested parties to consider. Instead of asking for an increase in oil royalty, Sabah may demand for the setting up of more specialised training institutes to produce capable manpower from Sabah in the oil and gas industry. This is important as Sabah is now building the SOGT (Sabah Integrated Oil and Gas Project) in Kimanis and the SOGIP (Sipitang Oil and Gas Industrial Park) in Sipitang. With sufficient supply of manpower, it is possible for Sabah to own a state-based oil and gas company and become a leading player in the region. As oil and gas are important sources of revenues for the country, they must be managed well for the sake of future generation of Malaysians. And this is only possible if we are all ready to look beyond the oil royalty issue.